Turkey Upgraded to Level Below Investment Grade by Moody’s

Turkey’s credit rating was raised to
a level below investment grade by Moody’s Investors Service,
which cited “significant” improvement in public finances and
policies to cut the current-account deficit. Lira bonds rallied.

Turkey’s debt was upgraded one step to Ba1, according to an
e-mailed statement. Moody’s kept its positive outlook on
expectations “the drivers that led to today’s rating upgrade
will continue to improve the country’s fiscal and macroeconomic
resilience.”

“An upgrade to an investment-grade rating will probably be
dependent on Turkey becoming more resilient to balance-of-
payment shocks, given the already favorable public-finance
metrics,” Moody’s said.

Prime Minister Recep Tayyip Erdogan’s government cut the
budget deficit to 1.3 percent of gross domestic product last
year from 3.6 percent in 2010 and state debt to 39 percent from
42 percent, according to Treasury data. Central Bank governor
Erdem Basci began setting benchmark borrowing costs daily in
October to slow inflation and cut the world’s second highest
current-account deficit after the economy grew 8.5 percent last
year.

Turkey’s inflation rate slowed to a seven-month low of 8.3
percent in May while the current account gap narrowed for six
straight months from the previous year to $5 billion in April.
The government targets a budget deficit of 1.5 percent and state
debt ratio of 37 percent of GDP this year.

Debt Outlook

Fitch Ratings ranks Turkey at BB+, one step below
investment grade with a stable outlook. Standard & Poor’s cut
the outlook on Turkey’s debt to stable from positive on May 1,
maintaining its BB rating, two steps below investment grade.

“Moody’s foreign-currency issuer rating for Turkey is now
the best out of the three agencies given the positive outlook,”
Societe Generale SA (GLE) said in an e-mailed report by strategists
Esther Law and Benoit Anne in London. “We expect the resilience
of long-end local debt to continue, boosted by the upgrade.”

Yields on benchmark two-year lira bonds fell 8 basis points
to 9.01 percent at 5:54 p.m. in Istanbul, the lowest level since
February. The lira climbed 0.4 percent to 1.7941 against the
dollar, gaining for a seventh day to the highest level since May
11. The main ISE National 100 (XU100) stocks index rose 0.2 percent to
59,401.26, the highest level since April 30.

Turkey’s general government debt level of 39.4 percent in
2011 was much lower than the Ba1 median of 54.6 percent and more
in line with the Baa3 median of 38.5 percent, according to
Moody’s.

‘Root Cause’

Government incentives to boost investment and private
pensions seek to address “the root causes of the country’s
external vulnerabilities, such as the high import content of its
exports, the low savings rate and its modest level of foreign-
exchange reserves,” Moody’s said. The policies will also
increase foreign direct investment inflows, it said.

The country’s diversification of exports is “an important
strength” which will help to buffer the economy should market
stress from the euro region intensify further, Moody’s said.

Moody’s would consider upgrading Turkey if the government
made further progress in lowering its external vulnerabilities
by reducing its current account deficit, increasing foreign-
exchange reserves, or cutting the private sector’s external
borrowing, it said.

The positive outlook on Turkey’s rating “would likely be
moved to stable” if progress on addressing external
vulnerabilities were to be reversed, according to the report.
Any material deterioration in public finances would prompt a
downward movement in the outlook, Moody’s said.

“Although not likely given the country’s improved
resilience, Moody’s believes that a sudden and sustained stop in
foreign capital flows would exert downward pressure on the
ratings,” the rating company said in its report.